Friday, March 25, 2011

Bonus Debentures

Dr. Reddy's Laboratories the pharma major has decided to issue "Bonus Debentures" , below is the gist of their corporate announcement.



"Dr. Reddy's Laboratories Limited has informed the Exchange that the Management Committee of the Board of Directors of the Company at its meeting held on March 24, 2011, has approved the allotment of 1,015,516,392 Unsecured Redeemable Non-Convertible Debentures of Rs. 5/- each carrying a coupon of 9.25% per annum, ("Bonus Debentures") amounting to an aggregate value of Rs. 5,077,581,960/- from the General Reserve by way of distribution as bonus, to the Members, based on their equity holding on the Record Date i.e. March 18, 2011, in the ratio of 6 (six) Bonus Debentures of Rs. 5/- each for every equity share of Rs. 5/- each held."

Corporate Announcement PDF

What does this mean:
If Instead of Bonus Debentures , if they had declared dividends , then it would have meant that each (1)share would have been eligible for 6 x Rs.5 ( 6  Bonus Debentures of Rs. 5/- each ) = Rs.30 as dividend

Now, instead of giving cash to the share holders , the company would issue FD ( Company FDs ,which are also called Debentures ) , so each share would now receive 6 (Six) Debentures of  Rs. 5/- each with a interest rate of 9.25% payable annually .Which means every year you would get Rs.2.775 as interest and these Debentures (Company FDs ) would mature , that is you would get your Rs.30 back in 2014.

These are called Bonus Debentures , because you did not pay that original Rs.30 , it was something the company invested in the Debentures , but in your name.

How does the company benefit :
The company would have needed money to expand their business or for some other business expense , so they normally would have , had to borrow from a bank , which could have charged them higher rate of interest . But with "Bonus Debentures" , they would get money at a lower rate of interest.

And it is also a way of treating/rewarding their share holders and hence enhancing their corporate image .

How does the share holder benefit :
The share holder finds that , company has invested in his name some money which fetches him 9.25% interest each year for 3 years , at the end of which he gets the Principal Amount too

The record date for this "Bonus Debentures" was 18th March 2011.

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